A screen at the trading post for McGraw-Hill shows its stock price, on the floor of the New York Stock Exchange in this file photo. / Richard Drew, AP

by Kevin McCoy, USA TODAY

by Kevin McCoy, USA TODAY

McGraw-Hill Companies Tuesday defended its Standard & Poor's credit rating division from the federal fraud lawsuit filed last week, reiterating that the Department of Justice action was "entirely without factual or legal merit."

"Rest assured, we will vigorously defend against these erroneous claims," CEO Harold McGraw III said during a conference call with Wall Street analysts as the financial information firm reported its fourth quarter earnings.

McGraw-Hill said it lost $216 million, or 78 cents per share, in the three months that ended Dec. 31. In comparison, the firm reported net income of $216 million, or 75 cents per share, for the period a year earlier.

The loss resulted largely from a $497million charge the company took on the pending sale of its McGraw-Hill Education division, part of a transition to a total focus on providing financial information. The company will be renamed McGraw Hill Financial as part of the sale agreement.

McGraw-Hill shares, which fell sharply last week after it disclosed the federal civil action, were down slightly at $44.21 in Tuesday afternoon trading.

The Department of Justice action, filed in California federal court, alleged that S&P defrauded investors of billions of dollars by issuing falsely inflated credit ratings on financial instruments at the heart of the national financial crisis. It could cost McGraw-Hill as much as $5 billion, the equivalent of several years' earnings.

As part of the action, government lawyers filed copies of internal emails and instant messages aimed at supporting their allegation that S&P's relatively high ratings of bonds tied to potentially risky mortgages were not unbiased and independent, as the company has long maintained.

In one 2005 email, an S&P executive stressed the need to poll some issuers of investments linked to such mortgages to gauge their tolerance for proposed revisions to analytic procedures that could make it tougher to win top credit ratings.

"This looks too much to me as though we are publicly backing into a set of levels driven by our clients," one S&P analyst warned in response.

McGraw-Hill said the e-mails "cherry-picked" by the government, showed "a culture of vigorous debate but not of wrongdoing."

"Claims that S&P deliberately kept ratings high when it knew they should be lower are simply not true as an objective assessment of the evidence will prove," the company said, noting that the credit-rating division issued 537 negative assessments on subprime residential mortgage-backed securities between February and July of 2007 alone.

"Unfortunately, these actions turned out to be insufficient in anticipating the severity of the housing crisis that ultimately came to pass," McGraw-Hill said. "However, the company does not believe the Department of Justice can prove that this failure - common to nearly everyone (peer ratings firms) at the time - was the product of intentional misconduct by anyone at S&P."